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Proprietary trading: different styles

When managing a proprietary trading firm, one of the most important parts of our business plan was to acknowledge the fact that one style does not fit all when it comes to day trading. Everyone does not have the same risk personality. Therefore to build a profitable firm Keystone had to offer more than one trading style. After we bring on new traders it is our job to determine to the best of our abilities which of the two dominant trading styles does this person seem to be a fit?

There are two methods of risk for short term trading, it doesn’t matter what security you are trading (Keystone Trading Group only trades stocks at the moment). One method is to trade larger size in very liquid stocks for short term moves. The profit and loss on each trade is very well defined. You are not in the market for very long periods of time. Downside risk is usually a very obvious short term reference point which is what allows the short term momentum trader or scalper to trade more size per idea.

The type of trader who gravitates to this style of trading is usually someone who does not have a high tolerance for risk and also wants instant gratification. the upside to this style is that it is very easy to learn and one can start to earn money consistently in a relatively short period of time. If there is a downside to this style it is the profit potential per trade is techincally limited.

The structured method of this style makes it a great way for new traders to earn money while getting experience and it is also a way for experienced traders to earn a consistent living without doing hours worth of research. One thing that should be remembered before you take on this style, you must be disciplined and you must make quick decisions. You will be trading larger size per trade with a very defined stop loss, if it hits your number get out immediately.

The other style of trading that we teach is what would be called position trading. We would boil this method down to one simple concept. Is there order flow? Is there a recognizable trend right now (1-5 days) that you can build a position for? Is there an opportunity for you to put on small trades until one of those trades follows through so that you can add to your shares as it moves in your favor.

This style of trading requires discipline also but it is a little different type of discipline. This time it is the discipline to do nothing. Nothing to wait for a high probability trade to unfold and nothing when you are in a good position. You can’t get out of a good trade too soon, you must be patient to let your profits ride. You must have a few trades that you can “ride’ with the full position you accumulated so that you can make up for all those small losses.

The toughest part of this style is to truly understand that you don’t need many winning trades per week or month to earn a good living. As new traders are learning this they usually over trade because they think they must be involved to make money.

If you know the trade expectation before the trade (scalp or position) you will know how to work your share size. You will know your share size because you know the expectation for the trade before you place the trade.

http://www.keystonetradinggroup.com/

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